With the drought cutting the grain supply, grain futures have skyrocketed. The anticipated sky high grain prices are fueling reports of higher food prices. Higher grains prices have some traders believing feeder cattle are too high to feed.
Whether or not it is a grain market or a livestock market, trading is now based all on ifs and not on the actual supply and demand. It is speculation with very little hedging. Grain and livestock producers are pleased with high prices, but watch out when the speculative traders decide to reverse. There will be hearings in Washington, Berlin, Moscow and Beijing. Already there are meetings on the high cost of food.
There is no doubt last year’s drought and the drought this year has been reducing cattle herds. At the same time, the supply of meat won’t be the entire reason for prices of food to increase. Demand for U.S. meats will need to remain constant at the very least to support cattle prices and for beef demand to remain near constant, exports must remain strong. The strong U.S. pork and beef exports enjoyed last year are history. Unless the U.S. Dollar drops, there is no way the U.S. can maintain exports.
DON’T BELIEVE ALL YOU READ
For the 30 plus years I have been a commodities broker specializing in agricultural markets, I can’t recall a time when false or exaggerated reports have been so rampant. There are far too many half-truths or falsehoods. It’s sad because the drought is devastating on its impact to agricultural production and it is psychologically hard and economically depressing seeing crops destroyed when nothing at all can be done about it. Certainly many grain producers have crop insurance, but collecting high prices on partial yields rarely makes up for lower prices on large yields. Farmers want big lush growth and seeing crops wither under sun burnt high temperatures is mentally draining. Often it is land that may have been in a family for decades to the century farms. It is land where the cost per acre is higher than any time in history and every penny is needed to be able to farm in 2013.
One of the most inaccurate reports showing up is the early slaughter of cattle due to the lack of hay and feed. Recently a money manager came out and said food prices could rise as much as 45 percent in the coming year. According to the report, “Ranchers, fearful they won’t be able to feed their herds amid rising prices, have been bringing their livestock to slaughter early.” Let’s set the story right. Is it high priced feed or are ranchers panic selling because feeder cattle, cows and bull prices at auctions have taken a nose dive because rumors of massive liquidation started the ball rolling?
Yes, there are ranchers reducing herds but they are bringing feeder cattle to auctions early because feeder cattle prices remain strong. Feeders have dropped but feeder cattle prices are well above breakeven prices. The feeders in areas where it has been dry are being bought or shipped to areas where feed is available.
If young cattle and calves were being sent to slaughter, why are the total number of calves sent to federally inspected slaughter down 13.5 percent compared to a year ago and total steers and heifers slaughtered down 4.2 percent from a year ago? To be accurate, the story could have said in areas where forage feeds are poor, cows are being sent to slaughter but the effect of the investment manager was to tug on people’s hearts followed by tugging on their wallets.
With the drought this year and last year’s drought in the Plains and Southwest, there is no doubt liquidation is taking place but it has been the breeding herd versus young cattle being sent for slaughter. There is no doubt by this fall and into the winter of 2012 and 2013, total slaughter in the U.S. will fall but to say it is inflationary and to see food prices move up 45 percent is simply outright guess work and flaming the fires of worry to shock investors without all the facts.
OUTLOOK FOR CATTLE
Recently, there have been rumors about Japan taking beef from cattle up to 30 months of age. In other words, Japan wants more ground beef versus more choice quality cuts. Many Japanese consumers don’t want to and can’t buy expensive quality cuts. Steers and heifers are sent to slaughter before they reach 30 months but cows that have had calves two to three times can come to slaughter at 30 months. A few muscle cuts can be pulled from a cow like the “beef tenderloins” sold on the shelves next to choice steaks but for the most part, it becomes ground meat. Allowing meat from cattle to 30 months will allow for more ground beef to enter Japan. I think terminology is important. I would think contracts would say something like, Bovine to 30 months versus using cattle alluding to steers and heifers.
Unfortunately, it will probably have little if any affect to quality steer and heifer prices. It could have the opposite effect. If lower quality products move to Japan, the need for higher quality cuts could drop to the proportion of “cow” meat taken. If that occurs, the higher quality cuts will have to drop in price or as it is happening now, will go to the cooler to be frozen.
U.S. COULD IMPORT MEAT
2011 was a great year for exporting U.S. meat. It was so good U.S. meat was sent to Brazil and trade agreements with other South American countries opened doors for U.S. meat. But with the rally in the U.S. Dollar and a drop in the Australian Dollar and the Brazilian Real, the desire for U.S. dropped.
With the tight ending grain stocks in the U.S. and with the lower currency in Brazil compared to the U.S. Dollar, grains are being imported from South America to the Southeastern U.S. to supply the mega hog and poultry facilities. I don’t think it should come as a surprise to hear if meat from Brazil and Australia in the near future is shipped into the U.S. in large quantities.
There are fast food chains advertising U.S. beef and pork, but many don’t. With tight supplies of lower grading beef and the reduced cow slaughter in the U.S. needed for the ground beef especially for the fast food chains, if livestock firms in the Southeast can import grain to reduce costs, they can import meat. With companies such as JBS with their corporate headquarters in Brazil, will it make any difference if profits are from U.S. or Brazil? Will stockholders care if Berkshire Hathaway’s stock improves if profits come from Brazil? Of course not.
The 2012 U.S. Drought is the most devastating event I have witnessed in my 30 years working in agricultural marketing. There are pictures of prime Midwestern farming country that look like scorched earth after major global wars. For 50 percent of the Midwest, it has been a horrible year to grow grain and to feed livestock.
Soaring grain prices and falling yields make it next to impossible to gauge any outlook. To say that historically high grain prices will drive food prices higher is looking at a small part of the equation. If grain producers and livestock producers feel high grains will push livestock prices higher, I am more apt to say high prices kill high prices.
One question I am asked every day is how high will grains rally? I honestly cannot say but with the U.S. crop hurt as bad as it is now, it is simple deduction to realize that until the new southern hemisphere crop is grown and harvested, and then a new U.S. crop is combined and delivered, any break with the devastation of this year can’t be too large. The risk is not selling a high but for livestock producers, hoping for a break in grain prices will allow for lower cost of production.
I remain steadfast believing the U.S. meat packing industry will go through a period of contraction. A smaller cattle supply will eat into fixed costs to the point margins will be negative through the fall and winter of 2012 and well into 2013 – especially with strong meat competition coming at it from South America and Australia.
Keeping cattle current is possibly the best advice I can offer anyone raising cattle. Heavy choice cuts going to storage will kill cattle prices as they did in 2009.
Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance doesn’t indicate future results.
Chris Lehner is an independent consultant. He can be reached at 913-787-6804 or email@example.com.